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The Case of XX v. XX on Disputes over the Operation of Contractual Joint Venture XX Industrial Building Development Co., Ltd
Jurisdiction: Arbitration; CIETAC Shenzhen
Date of Decision: Jan 20, 1999
1.Case Brief
In February 1993, the claimant and the respondent applied to XX Municipal Investment Commission for approval of the project on cooperation of industrial building and complete facilities. On February 5, 1993, the XX Municipal Investment Commission issued a reply (X Tou Han Zi [1993] No. 052) to approve the aforesaid project between the claimant and the respondent. On March 13, 1993, the two parties entered into the Contract on XX Industrial Building Development Co., Ltd of XX Special Economic Zone, the main clauses of which are as follows:
(1) The two parties intend to set up XX Industrial Building Development Co., Ltd in XX Special Economic Zone (hereinafter referred to as the contractual joint venture), the business scope of which is the construction, sales, rent and integrated services of industrial buildings and complete facilities, and the duration of which is 15 years.
(2) The aggregate investment of the contractual joint venture is HKD 70,000,000 and the registered capital is HKD 35,000,000.
(3) The conditions for cooperation are as follows:
The respondent should provide the land of 70 mu at the industrial centre on the west side of XX Road of XX city for the construction and development.
The claimant should provide the all the fund of HKD 70,000,000 for the project without any interest, of which the circulating fund is HKD 35,000,000. Conditions provided by the both parties should be accomplished within 3 months from the date when the business license of the contractual joint venture is obtained; otherwise, they should bear the liabilities for breach of contract.
(4) The two parties agree to withdraw the profit of the cooperative venture to repay their investment. The repayment duration is 15 years with HKD 5,000,000 for each year. After all the costs and expenses are deducted from the gross revenue, the remaining profits shall be distributed to both parties according to Article 13 with the repayment finished. The respondent should take 45% of the distributed profits and the claimant 55%.
(5) Obligations of the two parties
The respondent's obligations are as follows:
(a) Be liable to apply for approval, registration, business license etc. in order to set up the contractual joint venture.
(b) To provide the land for developing and constructing on schedule, and be liable for the planning, exploration, designing, application for project construction, "three connections and one leveling" and the construction for the development and operation.
(c) To be liable for the office, communication and transportation of staff of the contractual joint venture.
(d) To assist the claimant in custom entry of the equipments and materials, which are the contribution of the claimant, and the conveyance within China thereof.
(e) To help to recruit the managerial and technical personnel and other staff.
(f) Be liable for the sale, rent and comprehensive service on the domestic market.
(g) Be liable for other matters of the operation of the contractual joint venture.
The claimant's obligations are as follows:
(a) To be liable for all the capital which should be put in the right place timely in accordance with the situation of the operation.
(b) To purchase mechanical equipments, cargo conveyance, telecommunication facilities, and raw & auxiliary materials for the production on the overseas market according to the entrustment of the contractual joint venture. In addition, the price of the aforesaid products should be confirmed by the respondent.
(c) To be liable for the sale and rent of the buildings on the overseas market for the contractual joint venture.
(d) To introduce the overseas advanced technology and machinery.
(e) To handle other things of the operation of the contractual joint venture.
(6) Liabilities for breach of contracts: should all or part of the contract and its appendices be unable to be fulfilled owing to fault of one party, the party in breach should bear the liability therefore. Should it be the fault of both parties, they should bear their respective liabilities according to the actual situation.
(7) Amendment and cancellation of the contract
(a) The amendment of the contract and its appendices shall be effective only after the two parties conclude an amendment contract and obtain the approval of the original approval authorities.
(b) Should either of the parties to the contract be prevented from executing the contract by force majeure, such as earthquake, typhoon, flood, fire, war or other unforeseen events, the party encountering such force majeure events shall promptly notify the other party, and within 15 days thereafter the party shall provide detailed information of the events and a valid document for evidence issued by the relevant public notary organization explaining the reason of its inability to execute or delay the execution of all or part of the contract. Finally, the board of directors shall submit the application on the amendment or termination of the contract to the original approval authority for approval, after which the application comes into effectiveness.
(c) Should the contractual joint venture fails to operate or achieve the operational purpose due to one party's failure to perform the obligations as stipulated in the contract and articles of association, it shall be deemed that the party in breach terminates the contract unilaterally, and the other party shall have the right to claim the party in breach and to apply the original approval authority for approval of terminating the contract. If the two parties agree to continue the operation after the aforesaid event occurs, the party in breach shall firstly compensate the contractual joint venture for the losses therefrom.
(d) Upon expiration of the term of the contractual joint venture, all fixed assets shall not be evaluated but belong to the respondent.
(e) The contract shall be terminated under any of the following circumstances:
(i) the term of the contractual joint venture expires;
(ii) the contractual joint venture fails to continue its operation due to the gross losses;
(iii) the contractual joint venture fails to continue its operation due to the breach of one party;
(iv) due to force majeure such as natural disasters and wars etc., the contractual joint venture fails to continue its operation;
(v) the contractual joint venture fails to achieve its operational purpose and has no prospect; and
(vi) other situations.
The termination of the contract owing to any one of the above reasons except (i) must get the approval of the original approval authority.
Should the termination be due to (iii), the liability for breach of contract should be born and the party in breach ought to compensate the contractual joint venture for its losses therefrom.
(8) Settlement of disputes
Any dispute arising from the execution of or in connection with the contract shall be settled through friendly consultation between both parties. In case no settlement can be reached through consultation, the dispute shall be submitted to the Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade for arbitration (or Guangdong branch) in accordance with the temporary rules for termination procedure. The arbitral award is final and binding upon both parties.
During the settlement of dispute, except the matters of disputes, other clauses of the contract and articles of association should be performed continually by both parties.
The contractual joint venture contract also stipulates matters on board of directors, administration organ, labor management, taxation, accounting, auditing, foreign exchange management, insurance, labor union, applicable law and language etc..
On April 2, 1993, XX Municipal Investment Commission issued a reply (X Tou Wai Qi Zi [1993] No. 140):
(1) To approve of XX Special Economic Zone XX Construction Development General Company's (hereinafter referred to as Party A) and XX Investment Hong Kong Co., Ltd.'s (hereinafter referred to as Party B) setting up a contractual joint venture XX Special Economic Zone XX Industrial Building Development Co., Ltd (hereinafter referred to as the contractual joint venture), the duration of which is 15 years.
(2) The aggregate investment of the contractual joint venture is HKD 70,000,000 and the registered capital is HKD 35,000,000 . The conditions for cooperation are: Party A should provide the land of 70 mu at the industrial centre on the west side of XX Road of XX city for the construction and development; Party B should contribute HKD 35,000,000 in cash, and should also raise other fund apart from the registered capital.
(3) The business scope of the contractual joint venture is the construction, sales, rent and integrated services of industrial buildings and complete facilities. The land for developing is 70 mu, and the floor area is 110,000 square meters. The term of construction is 3 years and the foreign exchange balance shall be handled by the contractual joint venture itself.
(4) The legal address of the contractual joint venture is at the industrial centre on the west side of XX Road of XX city.
(5) Other matters shall be handled in accordance with the contract and the articles of association concluded by the two parties.
(6) Matters such as industrial and commercial management, taxation, custom, foreign exchange, banking, inspection,environment protection, insurance, national land, urban construction, real estate management and labor management etc. shall be in accordance with corresponding stipulations of the nation or the special zone.
(7) Registration for opening business shall be applied to related authorities.
On April 4, 1993, the claimant as Party B and the respondent as Party A concluded a supplementary agreement on the cooperative venture XX Special Economic Zone XX Industrial Building Development Co., Ltd (hereinafter referred to as the supplementary agreement), which stipulated as follows:
Clause 1: The investment proportion of the two parties
(1) Party A shall provide the land of 70 mu at XX industrial centre of XX city as cooperation condition. 15 mu (including "transportation, water, electricity and site clearing" as well as the state-owned land use certificate) shall be supplied for the first installment, and the price thereof shall be approved by the authority of national land. The date of land use contribution is the date on the voucher of the payment for the land.
(2) Party B shall offer fund, the amount of which shall the same as that of Party A, as the expenditure of the construction project and its complete appliances.
(3) If Party A makes additional contributions, Party B shall invest as much as Party A additionally. Party B, at the request of Party A, can supply the contractual joint venture with a short-term loan at the interest rate of 1% monthly.
(4) The investment proportion of each party shall be calculated with the same currency. RMB shall be the settlement currency of the contractual joint venture. The foreign exchange, which is contributed by Party B to the contractual joint venture, shall be converted to RMB.
Clause 2: The profit-distribution proportion for each party
Should the investment amount of Party A equal to that of Party B, the profit-sharing proportion is: Party A accounts for 45%; Party B accounts for 55%.
Clause 3: The operation of the contractual joint venture
The contractual joint venture should be operated by the two parties jointly. The managerial personnel and its salaries are decided by the board of directors. To secure the stability and the revenue of the contractual joint venture, there is no limit to the terms of office of the board of directors, the chairman and the vice-chairman as well as the general manager and the deputy general manager in the term of the contractual joint venture; these personnel should not be replaced unless special situations occur.
Clause 4: The role of this agreement
In case the contractual joint venture contract or articles of association is against this agreement, to confirm the obligations and rights of the two parties is subject to the latter. This agreement shall be drawn in several identical copies for preservation of both parties with all the texts being equally authoritative.
On April 24, 1993, the contractual joint venture got Business License for Enterprise as Legal Person of the PRC.
On February 16, 1995, the claimant, as Party B, and the respondent, as Party A, entered into Agreement on the suspension of XX Industrial Building Development Co., Ltd (herein after referred to as the suspension agreement) which stipulated as follows:
(1) Now that Party A failed to provide the developing land, the contractual joint venture decides to stop business for one year i.e. from February of 1995 to February of 1996; Party A is liable for the procedure of application for suspension.
(2) All the expenses of the contractual joint venture paid prior to the suspension (including the initial expenditure, designing expenses, exploration expenditure, application fees for project construction, the qualification fees, wages of crews and the office expenditure etc.) should be born by Party A.
(3) The two vehicles purchased by the contractual joint venture should be transferred to Party B to use it and own it.
(4) The original price of the two vehicles of RMB 850,225.53 being deducted from the contribution of Party B i.e. RMB 7,328,001.4 and HKD 6,619 without interest, the remaining is RMB 6,477,775.87 and HKD 6,619 until now, which should be repaid by Party A to Party B. If this repayment is done prior to the end of April of 1995, interest shall not be calculated. If it is done between May 1 and the end of May of 1995, there shall a monthly interest rate of 1.5%. If between June 1 and the end of June of 1995, the interest rate shall be 2% monthly. If between July 1 and the end of July of 1995, the rate shall be 2.5% monthly. If after August 1 of 1995, the rate shall be 3% monthly. The payment must not be done beyond the end of October of 1995.
(5) This agreement, the original contract and the original agreement are equally authoritative.
(6) This agreement is drawn in quadruplicate with each party holding two.
In the process of performance, disputes occurred between the two parties. On October 23, 1997, the claimant applied to CIETAC Shenzhen for arbitration in accordance with the contractual joint venture contract. Its arbitral requests are as follows:
(1) The respondent should pay the delayed debt of RMB 2,877,775.85 to the claimant.
(2) The respondent should pay the interest loss for delayed payment, RMB 2,457,031.08 (this amount is calculated until August 31 of 1997; the interest rate should be 3% monthly commencing from September 1 of 1997 to the day when all the debt are paid off), to the claimant.
(3) The respondent should pay the claimant the attorney fee of RMB 106,000.
(4) The arbitration fees should be born by the respondent.
The claimant stated as follows:
After the conclusions of the contractual joint venture contract and the supplementary agreement, the claimant, contributed RMB 7,328,001.40 and HKD 6,619 successively respectively on May 10 of 1993, May 19 of 1993, June 15 of 1993, November 22 of 1993 and February 4 of 1994, which accounted for 21% of the registered capital. However, until February 16 of 1995, the respondent did not offer the cooperative conditions as stipulated in the contract and agreement at all, which resulted in the impossibility of the operation of the contractual joint venture even since the establishment of it until now. Hence it is impossible to continue the performance of the contracts. Consequently the claimant and the respondent entered into the suspension agreement upon the consultation.
After the conclusion of the suspension agreement, the respondent paid back the claimant the debt of RMB 3,600,000 successively. But at the end of September of 1995, the respondent began to stop paying back the outstanding debt without any reason. Consequently, the claimant dunned the respondent for the debt, but it was fruitless for the respondent fudged on it.
Up to the present time, the amount of the unpaid debt was RMB 2,877,775.87 totally. In addition, according to the agreements, the respondent should pay RMB 457,031.08 for the delay (this amount was calculated until August 31 of 1997).
The debt failed to be paid due to the several breaches of contract of the respondent. For the debt payment, the claimant had paid attorney fee of RMB 106,000. Thus, according to Paragraph 1 of Article 6 of the reply of the supreme court to the Law on Economic Contracts Involving Foreign Interest (this law had been repealed since the Contract Law came into force and had not been applicable since October 1 of 1999), the respondent should pay the claimant the attorney fee for its creditor's rights.
On June 18 of 1998, XX Municipal Administration for Industry and Commerce revoked the Business License for Enterprise Legal Person of the PRC of the contractual joint venture (the registered number was Qi Zuo XX Zong Zi No. 005815).
On December 7 of 1998, the respondent filed a request to alter the original claim with the content as follows:
(1) To cancel the contractual joint venture contract and the supplementary agreement between the claimant and the respondent;
(2) the respondent should pay the claimant the investment principal loss of RMB 2,877,775 .85 and the interest loss of RMB 2,457,031.08 (this amount is calculated until August 31 of 1997; the interest commencing from September 1 of 1997 should be 3% monthly and be calculated up to the date when all the loss is compensated for).
(3) The respondent should pay the claimant the attorney fee of RMB 106,000.
(4) The arbitration fees of this case should be born by the respondent.
The facts and grounds supporting the above claims are as follows:
After the conclusion of the suspension agreement, the respondent failed to apply to the related authorities for the suspension as stipulated in the agreement and failed to go through the annual inspection procedure subject to regulations, which resulted in that the business license of the contractual joint venture was revoked by XX Municipal Administration for Industry and Commerce. The contractual joint venture has ceased to exist and the contract could not be implemented certainly, so it is inevitable and necessary to cancel the contract.
So far the respondent has caused the claimant a loss on investment principal of RMB 2,877,775.85 and one on interest of RMB 2,457,031.08 (this amount is calculated until August 31 of 1997), which was known and confirmed by the respondent. Thus in accordance with Article 18, 19 and 20 of the Law on Contracts involving Foreign Interest, the respondent should compensate the claimant for the above loss due to its breach of contract.
CIETAC Shenzhen Secretariat sent the application for altering the arbitration requests to the respondent, but it was returned for nobody took it.
2.Award
(1)
To cancel the contractual joint venture contract. The two parties shall liquidate the contractual joint venture according to the Law of the People's Republic of China on Chinese-foreign Contractual Joint Venture and the Detailed Implementation Rules thereof and the Measures for Liquidation of Foreign Investment Enterprise. The creditor's rights and liabilities shall be born by the respondent.
(2)
The respondent shall pay RMB 2,877,775.85 to the claimant within 30 days after this award is made. If overdue, there is an interest at the annual rate of 6%.
(3)
The claim on the interest shall be overruled.
(4)
The respondent shall pay the claimant the attorney fee of RMB 56,000 within 30 days after this award is made.
(5)
The arbitration fees of this case shall be born by the claimant and the respondent in the proportion of 3:7.
3.Comment
The legal matters in relation to this case are mainly as follows:
(1)
As for the applicable law
The disputes in this case are on the Chinese-foreign contractual joint venture contract. According to the Law of PRC on Chinese-foreign contractual joint ventures and the contractual joint venture contract between the two parties, the applicable law of the contract is Chinese law. Therefore, the Chinese law shall be applied to the settlement of the disputes in this case.
(2)
As for canceling the supplementary agreement
The first of all conditions for canceling a contract is that there is an effective contract. According to the Detailed Implementation Rules of the Law on Chinese-foreign Contractual Joint Ventures, the major amendment to the agreement, contract as well as articles of association of the contractual joint venture shall get the approval from the approval authority. In this case, the supplementary agreement between the two parties altered the cooperative conditions and the time limit thereof, which is the major amendment to the contractual joint venture contract, but it was not submitted to the approval authority for a approval after the conclusion, as a result of which, it is a ineffective contract, the effectiveness of which need not be eliminated through canceling it.
(3)
As for the cancellation of the contractual joint venture contract and compensation for the investment loss
The two parties entered into a suspension agreement on February 16, 1995, which emphasized that the contractual joint venture would stop business because the respondent failed to provide the developing land, and confirmed the capital invested by the claimant. The respondent promised in this suspension agreement to repay all the investment of the claimant before October of 1995 and to bear all expenses paid by the contractual joint venture before February of 1995.
Upon the deliberate analysis on the real meaning of the suspension agreement, the arbitral tribunal believes that it contains at least the followings: (a) the two parties agreed to terminate the contractual joint venture contract ahead of the schedule. Although there is no "terminate the contract" in the suspension agreement, "suspension" means to stop business. According to Article 22 of the Administrative Regulations of the People's Republic of China Governing the Registration of Legal Corporations, "An enterprise as a legal person, which fails to start operations 6 months after receiving its Business License for Enterprise as a Legal Person or which has ceased its operations for a year, shall be regarded as having closed down, and the registration authority shall recall its Business License for Enterprises as a Legal Person, duplicates of the License, take over its official seal and notify the banks at which it has opened an account of the cancellation of its registration.",and Article 20, "An enterprise as a legal person shall go through the procedures for canceling its registration with the registration authority when it closes down, is dissolved, declares bankruptcy or terminates its business operations for other reasons." , it can be inferred that "suspension" means the termination of the business operation which needs to cancel the registration. According to the aforesaid regulation, going through a procedure for canceling the registration needs a submission of the verification for paying off the debt or one of the documents on a liquidation organ being reliable for clearing up the creditor's rights and debts. All these indicate that the two parties agreed on the termination of the contractual joint venture contract in advance. (b) It is the breach of contract of the respondent that caused the termination of the contract. Because the respondent failed to provide the land use, the contractual joint venture could not operate. The respondent acknowledged, in the suspension agreement, it was its gross breach of contract that led to the fact that the contractual joint venture had to be closed. (c) The fund invested by the claimant had been handled in a certain way. Now that the contractual joint venture had been manipulated only by the respondent all the time, the suspension agreement stipulated that the respondent should repay the investment to the claimant and bear the early expenses of the contractual joint venture, while the two vehicles of the contractual joint venture should be possessed by the claimant.
Before the end of September 1995 (i.e. within half a year after the conclusion of the suspension agreement), RMB 3,600,000 had been paid to the claimant, but there was an outstanding debt of RMB 2,877,775.85 . The arbitral tribunal holds that the suspension agreement itself made no sense when the contractual joint venture could not operate in fact for some time and stop business for a long time; it made sense that the genuine intention of both parties had been expressed in the suspension agreement which had been performed partly, which can be showed: (a) the contractual joint venture had not done any activities from then on; (b) the respondent did a majority of the payment. Although the suspension agreement did not take the bona fide third party into account, which might be caused by that the two parties deemed there was not such a problem, or that they omitted it, as long as the agreement did not violate Chinese law and there is no evident to prove that it damaged the legitimate interest of the bona fide third party, the arbitral tribunal shall respect the intention of both parties and shall acknowledge it. Therefore, it can be said that it was in February of 1995 when the two parties agreed to cancel the contractual joint venture contract.
De Jure, even if the two parties had not concluded the suspension agreement, the claimant has adequate reasons to cancel the contractual joint venture contract. Article 29 of the Law of PRC on Economic Contracts Involving Foreign Interest prescribes that if the other party has breached the contract, thus adversely affecting the economic benefits they expected to receive at the time of the conclusion of the contract, a party shall have the right to notify the other party that a contract is rescinded. It also prescribes that if the contractually agreed conditions for agreed conditions for the rescission of the contract are present, a party shall have the right to notify the other party that a contract is rescinded. The contractual joint venture contract stipulates that it can be rescinded when the company could not continue its business operation due to the breach of contract of one party.
The business scope of the contractual joint venture is construction, sales, rent and integrated services of industrial buildings and complete facilities, which cannot be done without the land, even with the fund of the claimant. The respondent failed to provide the land of 70 mu for developing, which had breached the contract, and as a result the contractual joint venture contract could not be performed and the company could not operate.
In summary, the respondent had breached the contract; the economic benefits the claimant had expected to receive at the time of conclusion of the contract could not be realized at all; the contractual joint venture could not continue its operation. Hence the request on rescind the contractual joint venture contract shall be supported.
As to the compensation for the loss of investment, as analyzed above, the respondent should bear the responsibility of the termination of the contractual joint venture and the loss of the investment of the claimant because the respondent did not provide any cooperative condition in the process of performing the contractual joint venture contract, which breached the contract grossly. In addition, after the conclusion of the suspension agreement, the respondent failed to apply for approval as stipulated in the agreement, so it should also undertake the major responsibility thereof.
The arbitral tribunal holds that the property situation of the claimant should be recovered to the one when the contract did not performed i.e. when the claimant did not invest. The suspension agreement concluded by the two parties indirectly indicated this point, i.e. the respondent should compensate the claimant for the investment loss the purpose of which is to make the property situation of the claimant recover to one when there was no investment. For the respondent had paid the claimant RMB 3,600,000, it should pay the remaining of RMB 2877775.85.
Upon the above analyses, the arbitral tribunal shall permit to rescind the contractual and to terminate the contractual joint venture to liquidate it. Considering that the contractual joint venture has been manipulated by the respondent all the time, the creditor's rights and debts of the contractual joint venture, after its liquidation, shall be born by the respondent.
(4)
As for the interest
Although the respondent failed to provide any cooperative conditions as stipulated in the contractual joint venture contract until now, the claimant did not finish the cooperative condition with 3 months after obtaining the business license (i.e. before July 24, 1993). In addition, the claimant failed to apply to the original approval authority for termination of the contractual joint venture contract in time to prevent the losses from enlarging (until May 8 of 1997, the claimant submitted to XX Municipal Investment Commission a report to dissolve the contractual joint venture subject to law). The claimant should take certain related responsibilities in accordance with Chinese law. And the request of the claimant on the interest should not be supported.
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The Case of XX v. XX on Disputes over the Operation of Contractual Joint Venture XX Industrial Building Development Co., Ltd
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